Winter Olympians striving for medals at Sochi next week can expect to stay at the Mountain Olympic Village, visit the Mountain Tourist Centre and practice their gold-medal performances at the Biathlon and Ski Complex, all built by Gazprom OAO, Russia’s largest natural gas producer.

Meanwhile, the country’s largest oil producer, Rosneft, pledged US$180-million for the privilege of becoming a top-tier sponsor at the XXII Winter Olympics, and Lukoil OAO is the main sponsor of the country’s cross-country ski team, as Russian President Vladimir Putin’s favourite holiday resort prepares to host the world’s top athletes.

Mining and other Russian oligarchs in Mr. Putin’s inner circle have all chipped in to foot the US$51-billion bill to prepare the Black Sea resort — easily the most expensive Olympics. And even before Hayley Wickenheiser steps into the spotlight as Canada’s flag bearer at the Fisht Olympic Stadium on Feb. 7, Sochi has already had the dubious reputation of being labelled as “the most corrupt Olympics in history.”

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Still, not every oligarch has lined his pocket. Last year, some companies including Gazprom had reportedly privately requested the government to compensate them for some of the losses they had incurred. Russian state-owned enterprises have said 75% of their loans for Sochi Olympics-related projects (about 0.3% of GDP) are unlikely to be repaid.

The Olympics are a distraction for the Russian energy sector, which needs to raise its game in other areas.

Russia remains one of the largest producers of oil and natural gas, but the sector has suffered setbacks in its core market of Europe, where competition from new suppliers and regulatory changes has forced Gazprom to lower prices and change its business model.

“Russia is one of the biggest losers of the U.S. shale oil and gas revolution,” said Leslie Palti-Guzman, analyst at Eurasia Group, a political risk consultancy. “Russia had to rethink its marketing and pricing strategy as some of its gas projects such as the Arctic Shtokman LNG projects were shelved as the U.S. no longer needed to import Russian LNG.”

Rapid changes in global energy markets have wrong-footed Russia’s state-dominated oil and gas sector that funds 50%-60% of the country’s budget. Declining oil production from West Siberia, which accounts for 60% of Russian crude output, has also forced Russia to tap its formidable natural gas reserves – the largest in the world.

Moscow-based Energy Research Institute of the Russian Academy of Sciences estimates that Russian oil and gas exports could fall by as much as 15% over the next 15 years “resulting from the profound transformation of global energy markets.”

To stem the decline, the Kremlin has undertaken huge capital investments in the sector, which should reach an unprecedented 6%–7% of GDP (against a global average of about 1.3%–1.5% of GDP).

“For the next 10 years investments in energy projects announced by Russian Energy Minister Alexander Novak will be almost half more than capital investments of Canada, which intends to invest $650-billion during the same period,” president of Global Energy Igor Lobovsky, told an audience of energy executives late last year.

Warily, Moscow has also eyed neighbouring China to secure much-needed funding and market access, and the two countries are slowly putting aside traditional mutual distrust to craft a spate of deals.

This year is going to be an important one for Russia

Rosneft, which is working through a debt pile of US$72.6-billion, got a big boost last year after securing a US$270-billion deal with China to double oil supply to 600,000-bpd over 25 years. Mr. Putin believes the final figure could reach 900,000-bpd.

CNPC and Gazprom also signed a memoranda of understanding for 38 billion cubic metres of supply from Russia’s East Siberia gas fields, with first delivery scheduled for 2018. Chinese financing is likely to be a key component of the deal, with possible equity involvement also figuring in negotiations.

The final deal was reportedly expected to be signed on Jan. 24, but was pushed back to Mr. Putin’s May visit to China, as the two sides failed to agree on pricing.

“This year is going to be an important one for Russia,” said Ms. Palti-Guzman. “We will watch and see if Gazprom signs the deal with CNPC, which has been discussed for more than a decade. If it does not happen this year, it may never happen. China has other options eventually.”

Edward Morse, managing director and global head of commodities at Citigroup Global Markets Inc., says Russia is being pulled into China’s orbit, even as the Kremlin looks to exert its influence globally by expanding its customer base. The partnership suits China as it doesn’t like depending on sea lanes that are patrolled by the United States.

“Rosneft is dealing with debt on its balance sheet by allowing China to buy it out of trouble,” Mr. Morse said. “Russia will effectively be selling its oil more globally but it will be stuck with a couple of global partners on the buying side who will have much influence on how they settle prices and more influence than the Russian government.”

Energy consultancy Wood Mackenzie believes Russia’s pivot east and engagement with China on a range of huge deals could see energy trade between the two neighbours quadruple by 2025.

While demand for some of Russian oil may be secure, maintaining supply remains a challenge. The International Energy Agency expects Russian oil production to decline over the next two decades from 10.4 million bpd today to 9.4 million bpd by 2035.

“The big issue on oil production in Russia is that there are lots of fields that are very mature, and there are more challenging greenfield projects, in remote areas or offshore and generally more difficult and more expensive,” said Ian Thom, lead Russian upstream analyst at Wood Mackenzie.

To raise production levels, Russia has curbed its resource nationalism to recruit a number of major oil companies in areas where Russian oil companies lack expertise.

France’s Total SA has a 20% stake in the US$20-billion Yamal LNG project, while Exxon Mobil Corp. has teamed up with Rosneft to drill in the Arctic Ocean. Exxon is also working with Statoil to tap into Russian tight oil resources — the world’s largest shale oil play. Italian oil company Eni SA, Statoil and Exxon are also exploring Russian offshore basins together.

If successful, these developments could stem Russia’s oil production decline and light a fire in its gas production. The construction of the Eastern Siberia-Pacific Ocean oil pipeline that connects Russian deposits to Japan, China and South Korea, also puts Russia head.

While China will never rely on one energy partner for strategic purposes, it would put another dent in the proposed spate of LNG projects on the Canadian West Coast that are eyeing Asia, and notably China, as their key destination. Enbridge Inc. is also looking to build Northern Gateway, a conduit to link Alberta oil sands to Chinese and Asian markets.

“Instead of Canadian oil you could have Russian oil flowing through,” said Bob Schulz, Haskayne School of Business, University of Calgary. “I would be concerned that some of the pipelines, particularly Gateway, may not be needed.”

Seems like the hockey rivalry between Russia and Canada may one day extend to oil and gas, as both countries look to secure the biggest prize of all: China.